e-fundresearch.com: “The great return of market volatility”: What are your personal lessons learned from year-to-date market developments?
Hiroyasu Sato: It’s been a long 15 years since the market has last seen a tightening cycle. The cost pressures of increasing commodity prices and wages in the context of a rising rate environment are understandably impacting investor views on a possible turning point for the long expansion phase, and I feel it’s natural that there be a little nervousness in the market.
With regards to the coming year: How optimistic is your view into the future and what obstacles and challenges should investors be prepared to overcome? What key-developments that you are focusing on the most and how do you separate noise from relevant information?
Hiroyasu Sato: From a market perspective, top-down exogenous factors will probably play a big role; the trajectory of emerging markets as dollar funding continues to become more expensive, the backlash of U.S. tax cuts and the fiscal implications thereof, and of course the deleveraging of China and government policies to offset the downside. Specific to Japan, with the developed world gradually coming to normalization, the implications of a future unwind in monetary policy will need careful assessment. Credit in general – mortgages, consumer loans, foreign investments – all contribute to potential risk areas for the domestic financial system that could suffer side-effects in the process.
e-fundresearch.com: Why should investors consider an increase in allocation to your asset class and in particular your strategy in the current environment?
Hiroyasu Sato: With the prospect of at least a gradual normalization on the horizon, the question we ask ourselves is if this could lead to a hard landing in Japan, our focus market. Profitability is at historical highs, and it’s easy to imagine this to be a product of cyclical expansion, which could go into reverse without much warning.
This is contrary to our view however, in that we believe much of the recent upside in the private sector can be attributed to structural improvements in operational and capital efficiency that need not take a huge hit from a cyclical downturn. Margin expansion and efficient use of capital – as opposed to top-line expansion and leverage – have led to the fundamental growth of Japan in recent years, and we feel this momentum is just beginning.
Having said this, with cost of capital increasing however gradually, we have no illusions for the test of survival of the fittest. A welcome phenomenon for active strategies, this selection process should force consolidation and improve pricing power, leading to operational divergence and market dispersion.
Coincidentally, we have just discussed the two foundations of our investment strategy: we place significant emphasis on the mispricing of structural improvements in corporate profitability because we prefer the stability and long-term impact of these opportunities over top-down cyclical changes. We also invest in the long-term divergence of industry and value chain evolution, where winners and losers become apparent over time. Combined, we feel the strategy presents investors a vehicle to gain exposure to secular fundamental trends as opposed to timing of cyclical phases, which in our view is the superior long-term solution to investing in Japan.
e-fundresearch.com: Vielen Dank für das Gespräch, Herr Sato!
Hiroyasu Sato
Chief Portfolio Manager
Hiroyasu Sato is a Chief Portfolio Manager and responsible for the Focus strategy since October 2013. He joined Tokio Marine Asset Management in January 2011 as a Japanese equity research analyst.
Prior to this, his career started in 1998 as an equity research analyst at Daiwa Institute of Research Ltd., covering the Japanese electronics industry and later US/European electronics companies.
Through 15 years of experience in equity research, he has enhanced his ability to identify high quality management for his concentrated strategies.
He obtained a BSc and MSc in Nuclear Engineering from Kyoto University, and is a CMA charterholder.
